Daily Times

The Foreign Direct Investment (FDI) is most pivotal in any country’s development while the current policies of State Bank of Pakistan and other regulators totally incapable to attract the FDI in the country, said Policy Research Institute of Market Economy (PRIME) on Wednesday.

In a report compiled by the PRIME, it has reviewed the foreign exchange regulations in Pakistan. The report notes that regulatory policies by the State Bank of Pakistan and other regulators are not conducive to attract the FDI in the country.

According to the report, these regulatory constraints inhibit entry, proper utilization and exit of funds for any foreign investor to invest in startups and venture capital firms in Pakistan. Internationally, countries whose GDP has grown at high rates have been countries which relatively have lesser restrictions on entry of capital as well as foreign direct investment.

The publication includes case studies of China, India, Malaysia and Turkey. These countries started off with similar economies and economic policies pertaining to foreign exchange regulations, however overtime these countries adapted policies and measures to open their economy and ensure financial freedom for increased investments.

The report recommends that Pakistan needs to adopt measures to open up its economy and ensure freedom of capital for encouraging investments. Through structural reforms it needs to simplify procedures for foreign investment, introduce transparent operations and reduce regulations.

The report also highlighted that the country’s foreign debt and liabilities increased by $17.6 billion or 18.5 percent between FY-19 and FY-20. “This increase has been coupled with a deterioration in both the debt bearing and debt servicing capacity. During FY-20 the government borrowed an additional $3.7 billion worth of grants and loans to support the country’s corona relief efforts thus adding to the debt burden,” the report reads.

Like its predecessors, it added, the current government has not been able to fully capitalize on non-debt creating inflows like exports, remittances and foreign direct investment. “Consequently, debt servicing remains the largest expense in the federal budget. The government has paid $11.9 billion in external debt servicing during FY-20 which is 23 percent higher than the amount paid in FY19,” it recalled.

Notwithstanding the increase in public domestic debt from Rs 16.4 trillion to Rs 23.3 trillion one of the notable developments from debt management perspective in FY-19 was the re-profiling of domestic debt from short-term (6 months) to medium- and long-term (1 year to 10 years). The report further stated that the re-profiling curbed government’s rollover risk. Concurrently, a policy decision was taken to terminate borrowing from SBP- a stance lauded by the IMF since it demonstrates the government’s commitment to increased fiscal discipline and macroeconomic stability.

The report notes that the PTI-led government added Rs. 11.3 trillion or 45.2 percent of the public debt in two years, which is more than Rs. 10.7 trillion or 74.8 percent stocked by the previous government in five years.

As of June 2020, total public debt clocks at Rs. 36.3 tn with the government breaching 3 out of 4 targets under the Fiscal Responsibility and Debt Limitation Act (FRDL), 2005.

Furthermore, the total public debt-to-GDP ratio increased from 72.1 percent to 87.2 percent. The report postulates that with World Banks’ projected economic growth of 0.5 percent, the burgeoning debt-to-GDP ratio would be unsustainable, provided the stock of public debt is not curtailed in a timely manner. However, this would be possible only if the root causes of debt accumulation – revenue and foreign currency shortfall – are handled more efficiently.